Helping a Loved One Who Struggles with Addiction—Your Family Trust

Substance addiction is by no means rare, impacting as many as one in seven Americans. Because of its prevalence, navigating a loved one’s addiction is a relatively common topic in everyday life. But you should also consider it when working on your estate planning. Whether the addiction is alcoholism, drug abuse, or behavioral like gambling, we all want our loved ones to be safe and experience a successful recovery.  A properly created estate plan can help.

The idea that money from a trust could end up fueling those addictive behaviors can be a particularly troubling one. Luckily, it’s possible to frame your estate planning efforts in such a way that you’ll ensure your wealth has only a positive impact on your loved one during their difficult moments. 

Funding For Treatment:

One of the ways your trust can have a positive influence on your loved one’s life is by helping fund their addiction treatment. If a loved one is already struggling with addiction issues, you can explicitly designate your trust funds for use in his or her voluntary recovery efforts. In extreme cases where an intervention of some sort is required to keep the family member safe, you can provide your trustee with guidance to help other family members with the beneficiary’s best interest by encouraging involuntary treatment until the problem is stabilized and the loved one begins recovery.

Incentive Trusts:

Incentive features can be included in your estate planning to help improve the behavior of the person in question. For example, the loved one who has an addiction can be required to maintain steady employment or voluntarily seek treatment in order to obtain additional benefits of the trust (such as money for a vacation or new car). Although this might seem controlling, this type of incentive structure can also help with treatment and recovery by giving a loved one something to work towards. This approach is probably best paired with funding for treatment (discussed above), so there are resources to help with treatment and then benefits that can help to motivate a beneficiary.

Lifetime Discretionary Trusts:

Giving your heirs their inheritance as a lump sum could end up enabling addiction or make successful treatment more difficult. Luckily, there’s a better way.  Lifetime discretionary trusts provide structure for an heir’s inheritance. If someone in your life is (or might eventually) struggle with addiction, you can rest easy when you know the inheritance you leave can’t be accessed early or make harmful addiction problem worse. 

Of course, you want to balance this lifetime protection of the money with the ability of your loved one to actually obtain money out of the trust. That’s where the critical consideration of who to appoint as a trustee comes in. Your trustee will have discretion to give money directly to your beneficiary or pay on your loved one’s behalf (such as a payment directly to an inpatient treatment center or payment of an insurance premium). When dealing with addiction, your trustee will need to have a firm grasp of what appropriate usage of the trust’s funds looks like. Appointing a trustee is always an important task, but it’s made even more significant when that person will be responsible for keeping potentially harmful sums of money out of the addicted person’s hands. 

Navigating a loved one’s addiction is more than enough stress already without having to worry about further enablement through assets contained in your trust. Let us take some of the burden off your shoulders by helping you build an estate plan that positively impacts your loved one and doesn’t contribute to the problem at hand. That way, you can go back to focusing your efforts on the solution. Contact our office today to see how we can help.

If you want to ensure that your family is cared for, please click here to schedule your complimentary Estate Planning Strategy Call with San Francisco’s premier estate planning attorney, Matthew J. Tuller. 

3 Imprudent Ways to Leave Your Children an Inheritance

Estate planning [creating your Family Legacy Protection Plan] offers many ways to leave your wealth to your children, but it’s just as important to know what not to do. Here are some things that are all-too-common, but textbook examples of what not to do or try…

“Oral Wills”:

If you feel you have a good rapport with your family or don't have many assets, you might be tempted simply to tell your children or loved ones how to handle your estate when you’re gone. However, even if your family members wanted to follow your directions, it may not be entirely up to them. Without a written document, any assets you own individually must go through probate, and “oral wills” have no weight in court. It would most likely be up to a judge and the intestate laws written by the legislature, not you or your desired heirs, to decide who gets what. This is one strategy to not even try.

Joint Tenancy:

In lieu of setting up a trust, some people name their children as joint tenants on their properties. The appeal is that children should be able to assume full ownership when parents pass on, while keeping the property out of probate. However, this does not mean that the property is safe; it doesn't insulate the property from taxes or creditors, including your children’s creditors, if they run into financial difficulty. Their debt could even result in a forced sale of your property.

There’s another issue. Choosing this approach exposes you to otherwise avoidable capital gains taxes. Here’s why. When you sell certain assets, the government taxes you. But you can deduct your cost basis—a measure of how much you’ve invested in it—from the selling price. For example, if you and your spouse bought vacant land for $200,000 and later sell it for $315,000, you’d only need to pay capital gains taxes on $115,000 (the increase in value).

However, your heirs can get a break on these taxes. For instance, let’s say you die, and the fair market value of the land at that time was $300,000. Since you used a trust rather than joint tenancy, your spouse’s cost basis is now $300,000 (the basis for the heirs gets “stepped-up” to its value at your death). So, if she then sells the property for $315,000, she only pays capital gains on $15,000, which is the gain that happened after your death! However, with joint tenancy, she does not receive the full step-up in basis, meaning she’ll pay more capital gains taxes.

Giving Away the Inheritance Early:

Some parents choose to give children their inheritance early–either outright or incrementally over time. But this strategy comes with several pitfalls. First, if you want to avoid hefty gift taxes, you are limited to giving each child $14,000 per year. You can give more, but you start to use up your gift tax exemption and must file a gift tax return. Second, a smaller yearly amount might seem more like current expense money than the beginnings of your legacy, so they might spend it rather than invest. Third, if situations change that would have caused you to re-evaluate your allocations, it's too late. You don’t want to be dependent on them giving the cash back if you need it for your own needs. 

Shortcuts and ideas like these may look appealing on the surface, but they can do more harm than good. Consult with an estate planner to find better strategies to prepare for your and your families' future.

If you want to ensure that your family is cared for, please click here to schedule your complimentary Estate Planning Strategy Call with San Francisco’s premier estate planning attorney, Matthew J. Tuller. 

Does a Dynasty Trust Make Sense for Your Family?

Earlier this year, NBA team owner Gail Miller made headlines when she announced that she was effectively no longer the owner of the Utah Jazz or the Vivint Smart Home Arena. These assets, she said, were being placed into a family trust, therefore raising interest in an estate planning tool previously known only to the very wealthy—the dynasty trust.

Dynasty Trusts Explained:

A dynasty trust (also called a “legacy trust”) is a special irrevocable trust that is intended to survive for many generations. The beneficiaries may receive limited payments from the trust, but asset ownership remains with the trust for the period that state law allows it to remain in effect. In some states, a legal rule known as the Rule Against Perpetuities forces the trust to end 21 years after the death of the last known beneficiary. However, some states have revoked this limitation so, in theory, a dynasty trust can last forever.

Advantages and Disadvantages:

Wealthy families often use dynasty trusts as a way of keeping the money “in the family” for many generations. Rather than distribute assets over the life of a beneficiary, dynasty trusts consolidate the ownership and management of family wealth. The design of these trusts makes them exempt from estate taxes and the generation-skipping transfer tax, at least under current laws, so that wealth has a better ability to grow over time, rather than having as much as a 40-50% haircut at the death of each generation.

However, these benefits also come at the expense of other advantages. For example, since dynasty trusts are irrevocable and rely on a complex interplay of tax rules and state law; changes to them are much more difficult, or even potentially impossible as a practical matter, compared to non-dynasty trusts. Because change is very difficult or even impossible as a practical matter, the design of the dynasty trust needs to anticipate all changes in family structure (e.g. a divorce, a child's adoption) and assets (e.g. stock valuation, land appraisals), even decades before any such changes occur.

Is a Dynasty Trust Right for Your Family?

This trust usually makes the most sense for very wealthy families whose fortunes would be subject to large estate taxes. For multiple generations, it can defend estates from taxes, divorces, creditors or ill-advised spending habits. That said, if you desire to give your descendants more flexibility with their inheritance, a dynasty trust may not be right for you. To learn more about the pros and cons of this and other estate planning strategies, contact our office today.

If you want to ensure that your family is cared for, please click here to schedule your complimentary Estate Planning Strategy Call with San Francisco’s premier estate planning attorney, Matthew J. Tuller. 

5 Essential Legal Documents Required for Incapacity Planning

Comprehensive estate planning is more than your legacy after death, avoiding probate, and saving on taxes. Good estate planning includes a plan in place to manage your affairs if you become incapacitated during your life and can no longer make decisions for yourself. 

What happens without an incapacity plan?

Without a comprehensive incapacity plan in place, your family will have to go to court to get a judge to appoint a guardian or conservator to take control of your assets and health care decisions. This guardian or conservator will make all personal and medical decisions on your behalf as part of a court-supervised guardianship or conservatorship. Until you regain capacity or die, you and your loved ones will be faced with an expensive and time-consuming guardianship or conservatorship proceeding. There are two dimensions to decision making that need to be considered: financial decisions and healthcare decisions.

• Finances During Incapacity:

If you are incapacitated, you are legally unable to make financial, investment, or tax decisions for yourself. Of course, bills still need to be paid, tax returns still need to be filed, and investments still need to be managed.

• Health Care During Incapacity:

If you become legally incapacitated, you won’t be able to make healthcare decisions for yourself. Because of patient privacy laws, your loved ones may even be denied access to medical information during a crisis and end up in court fighting over what medical treatment you should, or should not, receive (like Terri Schiavo’s husband and parents did, for 15 years).

You must have these five essential legal documents in place before becoming incapacitated so that your family is empowered to make decisions for you:

1. Durable Power of Attorney:

This legal document gives your agent [called your Attorney-in-Fact] the authority to pay bills, make financial decisions, manage investments, file tax returns, mortgage and sell real estate, and address other financial matters that are described in the document.  

Financial Powers of Attorney come in two forms: “durable” and “springing.” A durable power of attorney goes into effect as soon as it is signed, while a springing power of attorney only goes into effect after you have been declared mentally incapacitated. There are advantages and disadvantages to each type, and we can help you decide which is best for your situation.

2. Revocable Family Trust:

This legal document has three parties to it: the person who creates the trust (you might see this written as “trustmaker,” “grantor,” or “settlor” — they all mean the same thing); the person who legally owns and manages the assets transferred into the trust (the “trustee”); and the person who benefits from the assets transferred into the trust (the “beneficiary”). In the typical situation, you will be the trustmaker, the trustee, and the beneficiary of your own revocable living trust. But if you ever become incapacitated, your designated successor trustee will step in to manage the trust assets for your benefit. Since the trust controls how your property is used, you can specify how your assets are to be used if you become incapacitated (for example, you can authorize the trustee to continue to make gifts or pay tuition for your grandchildren).

3. Advance Health Care Directive:

This legal document, also called a medical or Health Care Agent, gives your agent the authority to make healthcare decisions if you become incapacitated.

4. Living Will:

This legal document shares your wishes regarding end of life care if you become incapacitated. Although a living will isn’t necessarily enforceable in all states, it can provide meaningful information about your desires even if it isn’t strictly enforceable.

5. HIPAA authorization:

This legal document gives your doctor authority to disclose medical information to the agents selected by you. This is important because health privacy laws may make it very difficult for your agents or family to learn about your condition without this release. It is crucial that each fiduciary nominated in your estate plan that may need access to your HIPPA-protected health documents is granted such legal authority.

Is your incapacity plan up to date?

Once you get all of these legal documents for your incapacity plan in place, you cannot simply stick them in a drawer and forget about them. Instead, your incapacity plan must be reviewed and updated periodically and when certain life events occur such as moving to a new state or going through a divorce. If you keep your incapacity plan up to date and make the documents available to your loved ones and trusted helpers, it should work the way you expect it to if needed.

If you want to ensure that your family is cared for, please click here to schedule your complimentary Estate Planning Strategy Call with San Francisco’s premier estate planning attorney, Matthew J. Tuller.